Croatia Shouldn’t Rush to Feuding Euro Area, Milanovic Says

Aug. 30 (Bloomberg) -- Croatia should resist rushing to
adopt the euro after it joins the European Union as a feud over
bailouts dims the currency’s appeal, said the head of the party
that leads opinion polls before the December elections.

“Given the precarious state of affairs in Europe and in
the world’s financial markets, we will see what happens over the
next two to three years,” said Zoran Milanovic, the head of the
Social Democratic Party in an Aug. 26 interview in Zagreb.
“That’s certainly not the period in which we can even think of
joining the euro zone. So we have to take our time.”

The euro remains a long-term goal and the former Yugoslav
republic should focus on strengthening the economy after two
years of recession, Milanovic, 45, said. The cost of insuring
the debt against default using five-year credit-default swaps
rose to 427 basis points on Aug. 26 from 310 basis points a
month earlier, according to data provider CMA.

Croatia is preparing to become the EU’s 28th member in July
2013 as the world’s largest trading bloc roils over the bailouts
of its most-indebted countries including Greece and the euro-region’s economic recovery is losing steam. The world’s largest
economies may face as many as seven “lean years,” German
Finance Minister Wolfgang Schaeuble said on Aug. 27.

Milanovic, a trained lawyer, would inherit an economy
emerging from its longest recession since the breakup of
Yugoslavia. His Social Democratic Party, which last ruled in
2003, had 24 percent support in an Aug. 26 IPSOS-Puls survey of
1,000 people.

Transition to Market

Prime Minister Jadranka Kosor’s ruling Croatian Democratic
Union, which spent 16 of the past 20 years in power, had 20
percent backing. The margin of error was 3.1 percent.

Croatia should focus on completing its transition to a
market economy after the bloody disintegration of Yugoslavia
left the country lagging behind the other former communist
countries of eastern Europe, said Milanovic.

Poland and the Czech Republic, who remain outside the euro
region, should serve as role models for Croatia, said Damir
Grubisa, the director of the European Studies Center in Zagreb.

“The European Union is not perfect, but it’s the most
powerful catalyst for change in this part of Europe,” Grubisa
said. “Without it, we’d fall back to the Balkans.”

Croatia’s economy expanded 0.8 percent in the second
quarter from a year earlier, after a 0.8 percent contraction in
the first three months, the statistics office reported on Aug.
26. The Czech economy grew 2.4 percent in the period and Polish
gross domestic product probably rose 4.2 percent, according to
30 economists polled by Bloomberg. The country will report GDP
data today.

‘Deeply Corrupted’

Croatia is struggling with a corruption scandal that led to
the arrest of dozens of ruling-party officials including former
Prime Minister Ivo Sanader, who resigned in 2009 and handed the
reins of government to Kosor, his former second-in-command.

“Everything since Sanader’s demise points to the fact that
Croatia has been a deeply corrupted country, with the core in
the ruling party,” Milanovic said.

The Social Democrats lost to Kosor’s Democratic Union in
2007 by a margin of 5.4 percentage points. Milanovic this year
will head a four-party coalition that has 35 percent support in
the IPSOS survey, while Kosor’s party is running without
committed allies.

“We have a strong and determined opponent, which has deep
roots in a part of Croatian society, and that’s something one
shouldn’t underestimate,” Milanovic said. “This time, we have
much more patience and much more tactical wisdom.”

Asset Sales

The Social Democrats will probably be forced to turn to the
International Monetary Fund to strengthen the country’s recovery
amid the euro region’s sovereign debt crisis, said Goran
Saravanja, chief analyst at Zagrebacka Banka d.d., the Croatian
unit of Italy’s UniCredit SpA, said. The country may also have
to sell state assets to raise revenue, he said.

“I’d be surprised if big state companies aren’t sold by
the end of their mandate,” Saravanja said.

Strategic companies such as the national grid and other
utilities, should stay in state hands, according to Milanovic. A
contract signed by Sanader’s government that ceded control of
the oil company INA Industrije Nafte d.d. to Hungary’s Mol Nyrt.
“would be very hard, if not impossible, to revoke, due to
incompetence and negligence of the government, to say the
least,” said Milanovic. He said the government should instead
“concentrate on enhancing cooperation” with the Hungarian
refiner.

Sanader is testifying today in Zagreb as part of the probe
into whether he took a bribe to cede control of INA. He faces
questions by the Office for Suppression of Corruption and
Organized Crime at 1:30 p.m. at the Remetinec jail near Zagreb,
his lawyer Cedo Prodanovic said late yesterday.

Keeping budget expenditures at about 120 billion kuna ($23
billion) and discontinuing government borrowing while creating
jobs and attracting foreign investment would take Croatia out of
crisis, Milanovic said.

“We need new technologies, we need knowledge-based
companies,” he said. “To get that, we have to remove the red
tape to make doing business comfortable here, but at the same
time, we must maintain social balance and harmony.”